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What’s a GRAT?
Summarized merely, GRATs enable the grantor to freeze the worth of their property whereas transferring any future appreciation to the beneficiaries. Amongst property planning professionals, GRATs are seen as a strong technique for purchasers who wish to keep away from property taxes and cross these property to the subsequent technology of kids, grandchildren or others.
Usually, GRATs run for a set time period after which the property are transferred to the beneficiaries. GRATs additionally enable the grantor to take annuity earnings stream from the belief through the time period of the belief, therefore the title.
What’s within the Getting Rid of Abusive Trusts Act?
The invoice would add numerous extra necessities for the creation and operation of a GRAT, all supposed to impose prices on the usage of GRATs in order that they’re much less seemingly for use solely for tax avoidance functions.
The invoice provides the requirement, for instance, {that a} GRAT will need to have a minimal time period of 15 years and a most time period of the life expectancy of the annuitant plus 10 years. Second, the invoice prohibits any lower within the annuity through the GRAT time period, and it provides the requirement that the rest curiosity in a GRAT on the time of switch will need to have a minimal worth for reward tax functions.
Different key provisions dictate that any transfers of property between a belief and the deemed proprietor of the belief can be handled as a sale or alternate for earnings tax functions. This variation is meant to deal with prevalent tax planning strategies the place a taxpayer’s appreciating property could be transferred out and in of a GRAT with out incurring earnings tax or capital beneficial properties tax, in line with Wyden and King.
Crucially, the invoice additional stipulates that earnings tax paid on the GRAT’s earnings is to be designated as a present for the needs of the reward tax — except the proprietor is reimbursed from the GRAT throughout the identical calendar yr. As proposed, the reward quantity can’t be decreased by the usage of deductions such because the charitable deduction, marital deduction, or deductions for presents of tuition or medical care.
This variation, in line with the senators, is meant to deal with prevalent tax planning strategies the place a grantor of a GRAT makes use of the belief to cut back the worth of their property, consequently decreasing their property tax burden whereas avoiding extra earnings or reward tax.
Pictured: Sen. Ron Wyden
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